Asymmetric price adjustments with the most-favored-customer clause

In a model of price competition with a most-favored-customer clause we show that cost-change induced price adjustments are asymmetric. That is, the degree of price rigidity differs between increases and de-creases. With this policy one would expect firms to be reluctant to decrease prices because of the costs of rebates incurred. Indeed, we show that for some parameter values there is more downward than upward price rigidity. However, it may well be the arse that there is more upward rigidity. In particular this is true for a, duopoly where both firms offer the policy. The paper thus gives an alternative explanation for asymmetry in price adjustments.